Thursday, August 12, 2010

Doom In October?

Not too long ago, I was predicting another downturn in October. So far I'm not seeing anything to contradict that view. As I argued, the heavenly economic numbers that had the media elated, turned out to be dramatically wrong. The unemployment numbers enjoyed a boost from two stats that made them misleading. The unemployment benefits were temporarily cut, this dropped a large number of unemployed people off the stats, and then 'Jobs Saved' saw a big boost.

And jobs saved is probably the most bogus stat in current use. It's the measure of how many people got raises. And evidently a lot of government employees got raises, which made unemployment look better. Too bad they don't subtract the number of people who get pay cuts as jobs lost. It makes as much sense as the nonsense they push now.

We've also learned that across the board the rosy numbers touted as proof of a recovering economy, turned out to be false. Well false for everyone but the folks on Wall Street, who are enjoying our Federal Government's largess.

And the next item up that I count as an indicator of bad times on the horizon is stability in high gasoline prices. So long as gasoline prices stay high, it will eat into a disproportionate percentage of people's incomes and reduce spending on other goods and services.

I got the following chart from Gas Buddy.



Now this chart doesn't look too bad. You can see how prices dropped in May as I predicted. But they've held steady at a higher level with trend upwards. What I'll be watching for in September is another run up like we say in March and April. I don't know that we need as a dramatic of a run up as we did before, as the health of small businesses is precarious. Smaller and smaller increases in commodity prices can likely do comparable damage as the economy continues without the major correction I'm expecting the first quarter of next year.

For any of you following me from Peak Oil Debunked, this is economic behavior that I believe is driven by the fact that energy production is not growing, and thus industry is not growing, while the Gov continues to try to stimulate the economy through pure financial magic. It's like pumping the gas pedal when the fuel line is getting clogged. The engine will not run smoothly or go faster, no matter how hard you pump it. Not until the problem with supply is repaired.

There's a lot of folks over on Peak Oil Debunked that think that a new era of mega oil or mega energy production is coming in a few short years. One poster suggested that Brazil will add 5mbd to our production by 2015. He added that there were many similar fields that will be exploited. When I did a little searching on this I found that Petrobas is expecting to increase production by about 240,000bpd in 2014. This is a dramatic let down from the cornucopian viewpoint.

Since I started following the Peak Oil in 1998, I've heard many hundreds of people continually repeat the story that there will be no peak in our lifetimes. When I was engaged in conversation on USENet (remember that service?) back in 1999-2000, my research led me to believe that we'd see a short term peak in 2001 and this peak would crash the markets. I had many people cussing me out and telling me I was full of crap. I went with my research and sold most of the stock I had accumulated in the DOT Com bubble and sold in in Jan 2001. I made the same recommendation to friends and family. No one took my advice, though a High School buddy later told me that not a day goes by that he doesn't kick himself for not listening.

After 2001, things got muddy in the crystal ball department. I had posted many times on multiple forums and this blog, that the government response to Peak Oil will be to inflate a series of bubbles. The government will use fiscal policy to try to bring back back an era of endless growth. This is currently Obama's stated policy. But without growing energy supplies, industry can't grow. If industry can't grow, then pumping money into the economy will only grow those businesses that don't rely on real world goods and services. In other words, only the financial sector will grow. And while it grows, it's overarching shadow will do constant damage to other sectors of the economy.

By 2005, we began to see that the real estate market was going to be the next bubble. The question in my mind was, 'How long can it be propped up?' I honestly didn't know. As we watched the entire economy move from a dying industrial economy to a house flipper economy, We were inundated with stories about how this time it really is different. And I saw that this bubble which really started in the 1990s but gained speed at an accelerated rate after 2004 (As a White House driven stimulus plan), was becoming a world wide phenomenon. i understood that if everyone is doing it, then the likelihood that any nation would rock the boat and crash it all was lower, and it would make the bubble last longer. but how long?

This gets back to Peak Oil quickly enough. Our numbers on global oil production were really bad in those years. From 2001-2004, the EIA didn't publish the numbers on their website. They went from being very good about staying mostly up to date, to zero reporting. The rumor mill was suggesting that the numbers were bad, but you couldn't go to a public source and see it. The Peak Oil Deniers simply denied there was a drop in production.

When they finally did report the numbers, it was well after the recovery of oil production was underway. in the period between 2004 and 2009, production numbers were all over the place. The EIA has a history of trending their current numbers upwards, then correcting them a year or two later. During this period, the variance was even worse. Other sources were estimating production figures that looked like oil production had flattened out.

Because the numbers were so bad, it was impossible to use oil production as a prediction tool. We knew we were in a bubble. We knew it would crash. But we didn't have good data to determine when.

But when we look in hindsight, and see the peak in Conventional Oil in 2005 and then All Liquids in 2008, then compare those numbers to our economic time line, we get a similar correlation that we saw in the peak in early 2001, and the subsequent market crash in May. The housing market was showing strains after 2005, that the Bush financial team was able to overcome by opening the flood of money wider. In 2008 they couldn't hold it together any longer. Oil production had quit growing and demand kept rising. The subsequent fallout was a crash in our banking system, a ratcheting down of our economy as a whole and pressure for a real estate correction that is being prevented through the power of high speed money presses.

This system has not seen the correction it enjoyed in 2001. Cracks will keep opening up and weakening our economy until it does correct. But we can bet that the White House will fill in those cracks as quickly as they can and pretend they they are solving the problem with the rotting economic frame, through the judicious use of paint and plaster.

I've been waiting twelve years now for the cornucopians to produce the era of sustained and 'healthy' growth in energy production. It's always just around the corner. And yet we keep rounding corners and they say, "Well, the next corner will have a pot of gold for sure."

Maybe it will happen. I don't think it's a safe bet. I think it's highly improbable, but I can't say it's impossible.

But when will it happen? From industry reports such as this one from Petrobas, it looks like future production will not keep up with the decline.

Assuming things go as I have forecasted, after the economic dip in October and the banking crisis in the first quarter of next year, I expect things to go back to a quasi normal state, that will be a new low, but leveled again, proving that everything is fine and we would be better off, if we only picked better presidents... Well at least that's what the political talk will revolve around. I expect that the folks on Peak Oil Debunked and similar sites will continue to tell us that we're not taking into account, reserves that have not been discovered. And that will prove that we are wrong.

And yet, we do take them into account. We expect them to keep getting smaller and to be ever more difficult to produce oil from. That expectation was exactly while Colin Campbell and Jean Laherre were writing about in the May 1998 Scientific America article, "The End of Cheap Oil".

Before I end this article, it doesn't hurt to cover what the idea of 'Cheap' is. One poster on that debunking site, correctly points out that oil prices are driven upwards by monetary inflation. That is true. What he neglects to mention, and this is important, is that wages have not risen with oil prices. In fact oil prices keep going up and wages are in decline. When your income is dropping and prices are going up, then stuff is getting more expensive. This is all the theory that working man needs to understand. Knowing that the bankers are seeing prices relative to their income drop like they are in free fall, means nothing when you're counting out your change at the pump, trying to figure out how much gas you can afford to buy, or how little you can get away with until pay day.

The Era of Cheap Oil is over.


*******************************************************************

Update: The 5mbd suggested for Brazil turned out to be an estimate for the Atlantic as a whole. We had a misunderstanding. Still that figure taken out to 2015, is unlikely to cover depletion effects we'll be seeing world wide. We need dramatically faster increases in our energy supply to see a return to an era of infinite growth.

14 Comments:

At 10:53 AM, Anonymous Anonymous said...

So you can predict shoulder seasons?

LOL

 
At 11:06 AM, Anonymous greenJamie said...

Good post - I've suspected that the era of cheap oil is over, though what wider repercussions this will have we will have to wait and see...

 
At 11:07 AM, Blogger Weaseldog said...

Yeah, actually the resources side view correlates well with what some economists predict using purely economic means. It's not an exact match.

Prechter comes to mind in this sort of view.

Now you say, "LOL". I can read that different ways.

1. You agree with me. And you're glad that I've supported your view.
2. You think it's impossible to predict these things.
3. You think everybody always accurately predicts downturns, so it's dumb to bother.
4. You think every quarter is a downturn, always.

Is it one of the above, or something different?

It's funny that you laugh, because this forecasting technique made me a lot of money in 2001. I didn't see anyone else making the same call, and I nailed the month for the crash.

How did you do? Did you make a lot of money then? Did you get out at the very top like I did?

Or did you eat your shorts?

 
At 11:13 AM, Blogger Weaseldog said...

GreenJamie, I agree. With humans, unexpected things can happen. Our current politicians have a track record of doing the wrong thing at the wrong time, to solve the wrong problem.

But with that in mind, we can look at crisis and ask, out of the probable things that might happen, what's the worst decision that can be made? Take that notion then magnify it a bit, and you'll likely discover that you're being too optimistic.

But it seems they are simply following tradition...

"Politics is the art of looking for trouble, find, make a false diagnosis and then applying the wrong remedies." - Groucho Marx

 
At 11:39 AM, Anonymous edgar said...

vee have oil all over zee place.

 
At 11:41 AM, Blogger Weaseldog said...

No kidding Edgar. If you want oil, just buy a bag of shrimp.

 
At 12:14 PM, Blogger Bukko Canukko said...

Coming out next year -- the Toyota Shrimpmobile! 40 mies per prawn!

 
At 12:44 PM, Blogger Weaseldog said...

Anonymous another thought occurred to me.

You might think I'm only talking about the stock market. Some people do think that the Stock Market is the whole economy.

I'm not one of those.

But yes, the stock market is like to take a hit. But I'm also expecting to see another increase in bankruptcies, foreclosures, defaults, etc...

It's funny though, if you think I'm only talking about the stock market, then do you think a bank failure is when a bank's stock drops 5%?

 
At 2:41 PM, Blogger an average patriot said...

Good one wease! Life on the cheap is over. I am pissed because we said it hundreds of times but this was all done by Greenspan for Bush and the timing was no coincidence.

All the bailouts will do nothing. This is no where near as bad as it's going to get. That was obvious when we started saying it in 2007 and people laughed. I trust they are3 no longer laughing.

War and growing Government seems to be the only thing keeping us going. All bets are off if the republicans get back in and finish us and Bush's misagenda off!

 
At 8:33 AM, Blogger Dave Dubya said...

The empire is collapsing from within, and soon enough externally.

Yes, these times are about recession, depression, and most of all, regression.

The economic elite and their Republican Party want nothing short of neo-feudalism, where they are the lords and the rest of us are serfs.

“Tax the rich. Rebuild America.” They can afford it, and the country needs it.

 
At 3:35 PM, Blogger an average patriot said...

Dave after what Bush did for the rich that is exactly what should happen but it won't.

 
At 4:51 PM, Blogger fallout11 said...

One of my professors back in college was actively involved in the US atomic energy (and weapons) program for over 40 years. He used to tell us about how, when he was our age, all the scientist agreed that atomic power would be too cheap to meter, that the future was bright and George Jetson-like, that growth was infinite, etc. He was an old man at the time (and possibly dead now). In short, it didn't happen, despite 50+ years of optimistic promises to the contrary.
One of his favorite phrases, one that really sticks with me and summarizes the "Pollyannaism" you are seeing on places like Peak Oil Debunked (as if the name didn't already tell you everything you needed to know), was this:

"Nuclear fusion is the power source of the future....and always will be."
(This, from a noted expert in the field, a field he devoted much of his life to work on).

The future is an ever-receding target, full of promises that will go unrealized. That is the truth.

 
At 4:53 PM, Blogger fallout11 said...

Dave is right, taxing the rich is all we have left, as no one else has any wealth anymore!

 
At 8:26 PM, Anonymous Anonymous said...

lol

 

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